FXCM Launches FXCM Forex Execution Center: FXCM Explains Their No Dealing Desk Forex

New York, February 1, 2011—FXCM Inc., (NYSE: FXCM) launches the FXCM Forex Execution Center. With numerous requests for transparency in the forex market, the FXCM Execution Center will be a central hub on the FXCM websites that will provide forex traders with detailed information regarding forex execution practices. FXCM will continue to update this area over the coming months with insightful information and analysis.

The first step is to explain the different forex execution models. Unlike most other forex brokers, who act as market-makers, FXCM operates on an agency execution model.

FXCM takes the best bid and ask prices streamed to them from multiple large financial institutions, adds a markup (commission) on top of those prices, and shows them to clients. FXCM makes an identical amount of money in the form of pip markups (which are really commissions) regardless of whether the customer makes or loses money on a trade. As a result, FXCM earns consistent and transparent revenue per trade.

This is significantly different from brokers who operate a dealing desk execution model, where the revenue per trade is not as transparent. There are common practices, many times unknown to customers, which allow dealing desk firms to make more than just the mark-up attached to the prices streamed from large financial institutions. These practices include, but are not limited to, re-quoting customer trades, taking the opposing side of customers trades, and even preventing customers from trading or managing their positions during news events.

Many experienced forex traders may find the concept difficult to grasp. And it is especially hard for those new to the forex industry.

No Dealing Desk (FXCM): Learn How FXCM Executes Your Forex Trades

Watch Now: http://www.fxcm.com/fxcm-forex-execution.jsp

Dealing Desks (most of the other guys) learn about the potential conflict of interest between dealing desks and traders

Watch Now: http://www.fxcm.com/fxcm-forex-execution.jsp

To learn more about FXCM’s forex trading execution model, visit the FXCM Execution Center here: Forex Execution Center

About Us

FXCM Inc. (NYSE: FXCM) is a global online provider of foreign exchange (forex) trading and related services to retail and institutional customers world-wide.

At the heart of FXCM's client offering is No Dealing Desk forex trading. Clients benefit from FXCM’s large network of forex liquidity providers, enabling FXCM to offer competitive spreads on major currency pairs. Clients have the advantage of mobile trading, one-click order execution, and trading from real-time charts. FXCM's UK subsidiary, Forex Capital Markets Limited, also offers CFD products with no re-quote trading and allows clients to trade oil, gold, silver, and stock indices along with forex on one platform. In addition, FXCM offers educational courses on forex trading and provides free news and market research through DailyFX.com.
Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. Any opinions, analyses, or other information contained is provided as general market commentary and does not constitute investment advice. Read full risk disclaimer.


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Jaclyn Sales, Vice President of Corporate Communications
646-432-2463
jsales@fxcm.com
Investor Relations
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InvestorRelations@fxcm.com
www.FXCM.com

 

As far as I know, any automated execution center can emulate perfectly all the functions of a dealing desk. So this dichotomy is really a non-issue here. The point is, if I am making money with an account at FXCM, are you going to assign me to a special algorithm? Are you going to freeze my platform when Tier 1 market makers refuse to hedge your risk? These are the experiences I had with OTHER brokers. What guarantee do you offer that if I open an account with you these things will never happen to me again?

 

Did you guys watch the video. Seems like it goes like this:

you place an order ->Fxcm adds a markup (which is not fixed) the price + markup becomes your new feed rather than true market price -> here is the bit they call straight through processing where they don't offset your trade -> Next they find the best price bid/ask, this algorithm is easily subject to manipulation and you have no audit trail to verify what exactly is being done->then it goes to a market maker, NOT an ECN matching engine, who is probably going to send you to the cleaners -> They still offer no depth of market so you cannot see the volume at price.


Please correct me if I am wrong, but what has this done in the way of transparency? They say you can trade news and scalp, I remain exceedingly curious what happens to this "markup" and if these "market makers" will fill you when your trying to scalp and trade news. I am very interested in hearing your take on this.

 

They seem to be very familiar with the tricks played by FX dealing desks. Didn't they used to operate a dealing desk just a couple of years ago? Should this make me feel better or worse?

 

Hi Bill,

With NDD forex execution, there is no dealing desk taking the opposite side of your trade and managing that risk. Every order is hedged immediately therefore your profit is not FXCM's loss, and your loss is not FXCM's profit. It is a big issue because the conflict of interest is eliminated. Whether you make a profit or a loss on the trade has no impact on FXCM's bottom line since you automatically pay the pip mark-up on each trade. The pip mark-up is essentially a commission.

Order execution is anonymous. Whichever bank is quoting the best price gets the order. Laws of supply and demand are still at work here. If liquidity is no longer available at the price you clicked on, the order will then attempt to fill immediately at the next best available price or be rejected (depending on what type of order you submitted). Because all orders are anonymous, the banks can't single out traders with re-quotes or profile specific traders for order restrictions which you may have experienced when trading with a broker running a dealing desk.

So the answer to both of your questions is no. There's no reason to profile traders for order restrictions, re-quotes, dealer intervention, etc because the conflict of interest is eliminated. Your loss is not FXCM's profit and your profit is not FXCM's loss.

Let me know if you have any questions.

Jason
FXCM

 

Hi alpha,

Level II type depth of market is available on the Active Trader platform http://www.fxcm.com/active-trader.jsp , and you can view available liquidity at each price level.

You may also notice that the spreads on the active trader platform are also lower than on the regular FX Trading Station II platform. That's because you're paying a commission rather than the pip mark-up. The combined spread + commission is designed to lower the overall transaction cost. Because NDD execution revenue is driven by volume rather than traders losses, active trader is setup to reward higher volume traders with lower commissions.

There's a big difference between trading against your broker's dealing desk which can single out traders and control the rules for trading, and trading anonymously against multiple market makers on NDD execution. Having multiple market makers creates competition for orders and making it anonymous ensures the market makers can't single out traders. Scalping is ideal on NDD and we're perfectly happy since more trading volume translates into more revenue. At the same time you may also qualify for a discount in pricing through the active trader platform if your trading volume is high enough.

-Jason

 

Hi Jason,

Any plans to offer rebates for adding liquidity as some other FX brokers have started doing? Would this be something FXCM is looking into in the future?

 

are limit orders that better the best bid/offer shown to the world?

 

Yes, we are very familiar with how a dealing desk works because we used to offer dealing desk execution. That changed in 2007 when we made the decision to offer No Dealing Desk (NDD) forex execution.

Why did we do this? Multiple reasons.

<b>1) NDD allows traders to use any strategy they want, including scalping and trading during news events.</b> This isn’t always possible when trading against a dealing desk because these strategies can create risk management problems for their dealers. If you’re trading against the market trend, there’s no problem because your trades are immediately in a loss and probably becoming larger as the market moves against you. No need to offset the trade or manage the risk. Problem solved. If you’re trading in the direction of the market move, then it’s a completely different story. By the time your order reaches the dealing desk, the market could have easily closed a 2-3 pip spread and be in a profit. At that point the dealing desk either has to eat the loss or send back a re-quote. A dealing desk isn’t going to eat losses on a consistent basis so scalping is likely discouraged or time limit imposed on how long you have to keep trades open. With NDD, every trade is hedged immediately so you don’t have this problem.

<b>2) Eliminates the conflict of interest between the broker and trader.</b> This goes into what bill was talking about in the previous post. At the end of the day, the broker is in business to make money. If you’re a profitable trader and the broker doesn’t hedge that risk, the broker loses. FXCM is compensated by a pip mark-up on each trade (essentially a commission) so the outcome of your trade doesn’t impact FXCM’s bottom line.

<b>3) Reduces the risk of your broker going out of business if they screw up in the risk management department.</b> This coincides with point number two. Poor risk management of the positions being taken by the dealing desk could wipe out the business.

-Jason

 

Hi Brock,

I don't know of any plans, but your limit and limit entry orders can experience positive slippage. So while we don't pay for limit order creation, I would recommend using limit and limit entry orders to enter and exit trades as they could experience positive slippage and fill at a better price than you requested. We have an entire section of the website devoted to this and how to use limit and limit entry orders http://www.fxcm.com/forex-price-improvements.jsp .

-Jason